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I recently participated in a panel discussion on Dodd-Frank and was asked to give a “big-picture” view of the likely impact of the whole thing rather than discuss details of individual components. I don’t have notes from that discussion, but here are some big-picture points that I tried to make.

Regulation may be thought of as a tax.

The night before the vote on Dodd-Frank, new Senator Scott Brown discovered a $19 billion tax increase in its text and declared that he couldn’t vote for the bill if it contained a tax increase. The offending tax increase was removed to secure his vote.

What struck me was how we get fooled by words. The whole bill could be thought of as a tax many multiples of $19 billion. It will raise the cost of our financial system significantly and restrict its offerings to the public. Banks and other financial institutions must pass those higher costs onto its customers. To paraphrase a similar line, corporations don’t pay taxes; people pay taxes. Let’s not get fooled by the spelling of t-a-x. It may also be spelled r-e-g-u-l-a-t-i-o-n.

Financial Crises will always be just around the corner.

There is a positive relationship between risk and reward; so the temptation to incur more risk for more reward will always be with us. You don’t usually get rich seeking safety. Regulations may plug the gaps that caused the last crisis, but the next crisis is another matter.

If regulation is effective in averting trouble, we likely won’t know it.

Successful policies usually mean bad things don’t happen, which usually means nothing happens. Nobody will likely hold a parade a decade from now to celebrate the successes of Dodd Frank.

However, even successful policies often have negative adverse consequences. That will be noticed, and isn’t likely to be weighed in the public mind against the worse outcome that was averted.

Regulators have an incentive to over-regulate.

If regulators are charged with preventing bad things from happening, their mind-set will be to stop potentially bad things from happening. If they permit something that goes bad, they get blamed. If they permit something that doesn’t go bad, nobody notices.

The Food and Drug Administration is an extreme example of such perverse incentives because the stakes are so high. If they approve a new drug that saves many lives in the way intended, there may still be a few cases of negative side effects that may even cause a few deaths. The few lives lost will get much negative publicity and attract lawsuits for drug companies even if the number of lives saved is much greater than the number lost. The difference with financial regulations is only a matter of degree.